Testing deviations from purchasing power parity |
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| Affiliation: | 1. Department of Plant Sciences, Quaid-i-Azam University, Islamabad, Pakistan;2. Pakistan Academy of Sciences, Islamabad, Pakistan;1. Department of Physical Geography and Geoinformatics, Faculty of Natural Sciences, Comenius University, Ilkovičova 6, Mlynská dolina B1, SK-842 15 Bratislava, Slovak Republic;2. Department of Geography, West University of Timişoara, Bd. V. Parvan 4, 300223 Timişoara, Romania;3. Geography Department, Durham University, Durham DH1 3LE, UK;4. Institute of Geography, Faculty of Science, Pavol Jozef Šafárik University in Košice, Jesenná 5, 040 01 Košice, Slovakia |
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| Abstract: | This paper studies analytically how the presence of transportation costs in a model of deviations from purchasing power parity (PPP) affects the testing procedure of the PPP hypothesis. The analysis shows that in the presence of transportation costs traditional regression analysis will tend to reject the PPP hypothesis even if goods markets are well arbitraged, because the values of the regression coefficients are affected systematically by considerations that are independent of the degree to which markets are arbitraged. Thus, the content of the PPP approach cannot be tested satisfactorily without considering the systematic effects of transportation costs and other costs of goods arbitrage. |
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